You are a portfolio manager working for QUALDE Financial Solutions. You have computed the following information...

 

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You are a portfolio manager working for QUALDE Financial Solutions. You have computed the following information regarding four stocks listed on the New York Stock Exchange using 5 years of monthly data from January 2017-January 2022: FH Expected Return Standard Deviation The correlation matrix is: NQ FH WX MW NQ NQ 14% 22% 1 0.44 0.25 0.15 FH 12% 18% 0.00 -0.25 WX WX 10% 15% 1 0.66 MW MW 8% 12% 1 One of your clients provides you with $120m to invest into combinations of the above stocks. Required: a) Compute the portfolio expected return and risk of all possible equally weighted 2 asset portfolios using MW. [30 marks] b) Compute the minimum variance portfolio expected return and risk for a portfolio consisting of MW and FH. [20 marks] c) If you form an equally weighted portfolio of all four stocks and it makes a return of 2.5 percentage points below its expected return over the next month, what is the portfolio value? [15 marks] d) Explain the concept of diversification and outline how an investor might use the stocks above to reduce their portfolio risk. [15 marks] e) Outline how risk averse, moderately risk averse, and risk loving investors are likely to choose assets that make up portfolios. Comment on the shape and slope of their indifference curves in your answer. [20 marks] You are a portfolio manager working for QUALDE Financial Solutions. You have computed the following information regarding four stocks listed on the New York Stock Exchange using 5 years of monthly data from January 2017-January 2022: FH Expected Return Standard Deviation The correlation matrix is: NQ FH WX MW NQ NQ 14% 22% 1 0.44 0.25 0.15 FH 12% 18% 0.00 -0.25 WX WX 10% 15% 1 0.66 MW MW 8% 12% 1 One of your clients provides you with $120m to invest into combinations of the above stocks. Required: a) Compute the portfolio expected return and risk of all possible equally weighted 2 asset portfolios using MW. [30 marks] b) Compute the minimum variance portfolio expected return and risk for a portfolio consisting of MW and FH. [20 marks] c) If you form an equally weighted portfolio of all four stocks and it makes a return of 2.5 percentage points below its expected return over the next month, what is the portfolio value? [15 marks] d) Explain the concept of diversification and outline how an investor might use the stocks above to reduce their portfolio risk. [15 marks] e) Outline how risk averse, moderately risk averse, and risk loving investors are likely to choose assets that make up portfolios. Comment on the shape and slope of their indifference curves in your answer. [20 marks]

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a To compute the portfolio expected return and risk of all possible equally weighted 2asset portfolios using MW we need to calculate the weighted average of the expected returns and the standard devia... View the full answer